SECURITY AGREEMENT

         THIS  SECURITY  AGREEMENT is made and entered into as of the 5th day of
November, 1998, by THREE-FIVE SYSTEMS, INC., a Delaware corporation (hereinafter
called  "Debtor"),  whose chief executive office is located at 1600 North Desert
Drive, Tempe, Arizona 85281-1212,  in favor of IMPERIAL BANK ARIZONA, an Arizona
banking  corporation,  as Agent for the Banks listed in the hereinafter  defined
Credit  Agreement and for the Issuing Bank (as defined in the Credit  Agreement)
and its successors  and assigns  (hereinafter  called  "Secured  Party"),  whose
address is 400 East Van Buren, Suite 900, Phoenix, Arizona 85004.

1. SECURITY INTEREST

         Debtor hereby grants to Secured Party a security interest  (hereinafter
called the "Security  Interest") in all of Debtor's right, title and interest in
and to the  personal  property  described  on  Schedule A attached  hereto  (the
"Collateral").

2. OBLIGATION SECURED

         The  Security  Interest  shall  secure,  in such order of  priority  as
Secured Party may elect:

                  (a)  Payment  of the sum of  $15,000,000.00  according  to the
         terms of that Revolving  Promissory  Note (RLC) dated November 5, 1998,
         made by Debtor and all present and future  Subsidiaries  (collectively,
         the  "Borrower"),  payable to the order of Secured Party,  evidencing a
         revolving  line of credit,  all or any part of which may be advanced to
         Borrower,  repaid by Borrower and readvanced to Borrower,  from time to
         time,  subject  to the  terms and  conditions  thereof,  with  interest
         thereon,  extension and other fees,  late charges and attorneys'  fees,
         according  to the terms  thereof,  and all  extensions,  modifications,
         renewals,  restatements or replacements thereof (hereinafter called the
         "RLC Note");

                  (b)  Payment  of the sum of  $10,000,000.00  according  to the
         terms of that Revolving  Promissory Note (RLCT) dated November 5, 1998,
         made by Borrower,  payable to the order of Secured Party,  evidencing a
         revolving  line of credit,  all or any part of which may be advanced to
         Borrower,  repaid by Borrower and readvanced to Borrower,  from time to
         time,  subject  to the  terms and  conditions  thereof,  with  interest
         thereon,  extension and other fees,  late charges and attorneys'  fees,
         according  to the terms  thereof,  and all  extensions,  modifications,
         renewals,  restatements or replacements  thereof (together with the RLC
         Note, hereinafter called the "Note");

                  (c)  Payment,  performance  and  observance  by Debtor of each
         covenant,  condition,  provision and agreement  contained herein and of
         all monies  expended or advanced by Secured Party pursuant to the terms
         hereof, or to preserve any right
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         of Secured Party hereunder, or to protect or preserve the Collateral or
         any part thereof; and

                  (d)  Payment,  performance  and  observance  by Debtor of each
         covenant,  condition,  provision and agreement contained in that Credit
         Agreement  dated November 5, 1998, by and between  Borrower,  the Banks
         and  Secured  Party as agent  for the Banks  and the  Issuing  Bank (as
         extended,  modified,  renewed,  restated or replaced hereinafter called
         the "Credit Agreement") and in any other document or instrument related
         to the  indebtedness  described  in  subparagraph  (a) above and of all
         monies  expended  or advanced  by Secured  Party  pursuant to the terms
         thereof or to preserve any right of Secured Party thereunder.

All  of  the  indebtedness  and  obligations   secured  by  this  Agreement  are
hereinafter collectively called the "Obligation."

3. USE; LOCATION; CONSTRUCTION

         3.1  The  Collateral  is or will be  used  or  produced  primarily  for
business purposes.

         3.2 The  Collateral  will be kept at Debtor's  address set forth at the
beginning of this Agreement  and/or at the location(s)  listed on Schedule B, if
any, attached hereto.

         3.3 Debtor's records concerning the Collateral will be kept at Debtor's
address set forth at the beginning of this Agreement  and/or at the  location(s)
listed on Schedule B, if any, attached hereto.

4. REPRESENTATIONS AND WARRANTIES OF DEBTOR

         Debtor hereby represents and warrants that:

         4.1  Debtor  is  the  owner  of the  Collateral  free  of all  security
interests or other encumbrances except the Security Interest and Permitted Liens
(as defined in the Credit  Agreement)  and no financing  statement  covering the
Collateral  is filed or recorded in any public office except with respect to any
Permitted Liens.

         4.2 The  Collateral  is,  and is  intended  to be,  used,  produced  or
acquired  by Debtor for use  primarily  for  business  purposes.  The address of
Debtor  set forth at the  beginning  of this  Agreement  is the chief  executive
office of Debtor.

         4.3 Each material account, chattel paper or general intangible included
in the  Collateral  is genuine  and  enforceable  in  accordance  with its terms
against the party named  therein who is obligated  to pay the same  (hereinafter
called  "Obligor"),  and the  security  interests  that are part of each item of
chattel paper included in the Collateral  are valid,  first and prior  perfected
security  interests.  To the  knowledge  of  Debtor,  each  material  Obligor is
solvent, and the amount that
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Debtor has  represented  to Secured  Party as owing by each such  Obligor is the
amount actually and  unconditionally  owing by that Obligor,  without  deduction
except for normal cash discounts where applicable; to the knowledge of Debtor no
material Obligor has any defense,  setoff,  claim or counterclaim against Debtor
that can be asserted  against Secured Party whether in any proceeding to enforce
the Security Interest or otherwise. Each document,  instrument and chattel paper
included in the  Collateral is  materially  complete and regular on its face and
free from evidence of forgery or alteration. No material default has occurred in
connection  with any  instrument,  document  or chattel  paper  included  in the
Collateral,  no payment in  connection  therewith is  materially  overdue and no
presentment, dishonor or protest has occurred in connection therewith.

5. COVENANTS OF DEBTOR

         5.1 Except as otherwise  permitted in the Credit Agreement,  and except
as to its inventory which may be sold in the ordinary course of business, Debtor
shall not sell,  transfer,  assign or otherwise dispose of any Collateral or any
interest  therein  (except as  permitted  herein)  without  obtaining  the prior
written  consent of  Secured  Party and shall  keep the  Collateral  free of all
security  interests or other  encumbrances  except the Security Interest and any
Permitted  Liens;  provided  however that Debtor may sell,  transfer,  assign or
otherwise  dispose of any  Collateral  ("Disposed  Collateral")  or any interest
thereon without  obtaining the prior written consent of Secured Party so long as
(i) Debtor is doing so in the ordinary  course of business,  (ii) the book value
of any such  Disposed  Collateral  does not  exceed  $5,000.00,  and  (iii)  the
aggregate book value of all such Disposed Collateral does not exceed $100,000.00
in any  fiscal  year.  Although  proceeds  of  Collateral  are  covered  by this
Agreement,  this shall not be construed to mean that Secured  Party  consents to
any sale of the Collateral.

         5.2 Debtor shall keep and maintain the Collateral in good condition and
repair and shall not use the  Collateral  in violation of any  provision of this
Agreement or any  applicable  statute,  ordinance or regulation or any policy of
insurance insuring the Collateral.

         5.3 Debtor shall provide and maintain insurance insuring the Collateral
against  risks,  with  coverage and in form and amount  satisfactory  to Secured
Party.  At Secured  Party's  request,  Debtor shall deliver to Secured Party the
original policies of insurance containing endorsements naming Secured Party as a
loss payee.

         5.4 Debtor shall pay when due all taxes,  assessments and other charges
which may be levied or assessed against the Collateral.

         5.5 Debtor shall  prevent any portion of the  Collateral  that is not a
fixture  from being or becoming a fixture  and shall  prevent any portion of the
Collateral  from being or becoming an accession to other goods that are not part
of the Collateral.

         5.6 Debtor shall keep all titled vehicles properly  registered with and
licensed,  shall provide  Secured  Party with the license  numbers of all titled
vehicles, and if requested by Secured Party shall cause the Security Interest to
be shown as a valid first lien on the Certificate of Title.

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<PAGE>
         5.7 Debtor,  upon demand,  shall promptly  deliver to Secured Party all
instruments,  documents and chattel  paper  included in the  Collateral  and all
invoices,  shipping or delivery  records,  purchase  orders,  contracts or other
items related to the Collateral.  Debtor shall notify Secured Party  immediately
of any  material  default by any  Obligor in the payment or  performance  of its
obligations with respect to any Collateral.

         5.8 Debtor shall give Secured  Party  immediate  written  notice of any
change in the location of: (i) Debtor's chief executive  office;  (ii) except as
its transfer is permitted under the Credit Agreement, the Collateral or any part
thereof; or (iii) Debtor's records concerning the Collateral.

         5.9 After  reasonable  notice by Secured  Party,  Secured  Party or its
agents may inspect the  Collateral  at  reasonable  times and may enter into any
premises  where the  Collateral is or may be located.  Debtor shall keep records
concerning  the  Collateral in accordance  with  generally  accepted  accounting
principles.  Secured  Party  shall  have free and  complete  access to  Debtor's
records and shall have the right to make extracts  therefrom or copies  thereof.
Upon request of Secured Party from time to time,  Debtor shall submit up-to-date
schedules of the items comprising the Collateral in such detail as Secured Party
may require.

         5.10 Debtor,  at its  reasonable  cost and expense,  shall  protect and
defend this  Agreement,  all of the rights of Secured Party  hereunder,  and the
Collateral  against all claims and demands of other parties,  including  without
limitation defenses,  setoffs,  claims and counterclaims asserted by any Obligor
against  Debtor and/or  Secured  Party.  Debtor shall pay all claims and charges
that in the  reasonable  opinion of Secured  Party might  prejudice,  imperil or
otherwise affect the Collateral or the Security Interest.  Debtor shall promptly
notify Secured Party of any levy, distraint or other seizure by legal process or
otherwise of any part of the Collateral and of any threatened or filed claims or
proceedings that might in any way affect or impair the terms of this Agreement.

         5.11 The Security Interest, at all times, shall be perfected and except
for  Permitted  Liens shall be prior to any other  interests in the  Collateral.
Debtor  shall  act and  perform  as  necessary  and shall  execute  and file all
security agreements,  financing  statements,  continuation  statements and other
documents  requested by Secured  Party to  establish,  maintain and continue the
perfected  Security  Interest.   Debtor,  on  demand,  shall  promptly  pay  all
reasonable  costs and expenses of filing and  recording,  including the costs of
any searches,  deemed reasonably necessary by Secured Party from time to time to
establish and determine the validity and the continuing priority of the Security
Interest.

         5.12 If Debtor  shall fail to pay any taxes,  assessments,  expenses or
charges,  to keep all of the  Collateral  free from  other  security  interests,
encumbrances or claims,  to keep the Collateral in good condition and repair, to
procure and  maintain  insurance  thereon,  or to perform  otherwise as required
herein,  Secured  Party may advance  the monies  necessary  to pay the same,  to
accomplish  such  repairs,  to procure  and  maintain  such  insurance  or to so
perform;  after reasonable  notice by Secured Party to Debtor,  Secured Party is
hereby  authorized  to enter upon any property in the  possession  or control of
Debtor for such purposes.

                                       -4-
<PAGE>
         5.13 All rights,  powers and remedies granted Secured Party herein,  or
otherwise available to Secured Party, are for the sole benefit and protection of
Secured Party, and Secured Party may exercise any such right, power or remedy at
its option and in its sole and absolute  discretion without any obligation to do
so. In addition,  if under the terms hereof,  Secured Party is given two or more
alternative  courses  of  action,  Secured  Party may elect any  alternative  or
combination  of  alternatives  at  its  option  and  in its  sole  and  absolute
discretion.  All monies advanced by Secured Party under the terms hereof and all
amounts paid,  suffered or incurred by Secured Party in exercising any authority
granted herein,  including  reasonable  attorneys'  fees,  shall be added to the
Obligation,  shall be secured by the Security  Interest,  shall bear interest at
the Default Rate (as defined in the Credit  Agreement)  until paid, and shall be
due and payable by Debtor to Secured Party immediately without demand.

6. NOTIFICATION AND PAYMENTS; COLLECTION OF COLLATERAL; USE OF
   COLLATERAL BY DEBTOR

         6.1  Secured  Party,  after the  occurrence  of any  Event of  Default,
defined below,  and with prior written  notice to Debtor,  may notify any or all
Obligors of the  existence of the Security  Interest and may direct the Obligors
to make all payments on the Collateral to Secured Party. Until Secured Party has
notified the Obligors to remit payments  directly to it, Debtor, at Debtor's own
cost and expense, shall collect or cause to be collected the accounts and monies
due under the  accounts,  documents,  instruments  and  general  intangibles  or
pursuant to the terms of the chattel paper. Secured Party shall not be liable or
responsible for any embezzlement, conversion, negligence or default by Debtor or
Debtor's  agents  with  respect to such  collections;  all  agents  used in such
collections  shall be agents of Debtor and not agents of Secured  Party.  Unless
Secured  Party  notifies  Debtor in  writing  that it waives  one or more of the
requirements  set forth in this  sentence,  any  payments  or other  proceeds of
Collateral received by Debtor,  before or after notification to Obligors,  shall
be held by Debtor in trust for Secured Party in the same form in which received,
shall not be  commingled  with any assets of Debtor and shall be turned  over to
Secured Party not later than the next business day following the day of receipt.
All payments and other proceeds of Collateral received by Secured Party directly
or from Debtor shall be applied to the  Obligation  in such order and manner and
at such time as Secured  Party,  in its sole  discretion,  shall  determine.  In
addition,  Debtor  shall  promptly  notify  Secured  Party of the  return  to or
possession by Debtor of goods  underlying any Collateral;  Debtor shall hold the
same in trust for Secured  Party and shall  dispose of the same as Secured Party
directs.

         6.2  Secured  Party,  after the  occurrence  of an Event of Default and
without notice to Debtor, may demand,  collect and sue on the Collateral (either
in Debtor's or Secured Party's name), enforce,  compromise,  settle or discharge
the  Collateral  and endorse  Debtor's name on any  instruments,  documents,  or
chattel  paper  included  in or  pertaining  to the  Collateral;  Debtor  hereby
irrevocably appoints Secured Party its attorney in fact for all such purposes.

         6.3 Until the  occurrence of an Event of Default,  Debtor may: (i) use,
consume and sell any inventory  included in the  Collateral in any lawful manner
in the ordinary course of Debtor's  business provided that all sales shall be at
commercially reasonable prices; and (ii) subject to
                                       -5-
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Paragraphs 6.1 and 6.2 above,  retain possession of any other Collateral and use
it in any lawful manner consistent with this Agreement.

7. COLLATERAL IN THE POSSESSION OF SECURED PARTY

         7.1  Secured  Party  shall  use  such   reasonable  care  in  handling,
preserving  and  protecting  the  Collateral  in its  possession  as it  uses in
handling similar  property for its own account.  Secured Party,  however,  shall
have no liability for the loss,  destruction or  disappearance of any Collateral
unless there is  affirmative  proof of a lack of due care;  the lack of due care
shall not be implied solely by virtue of any loss, destruction or disappearance.

         7.2 Debtor shall be solely  responsible  for taking any and all actions
to preserve rights against all Obligors; Secured Party shall not be obligated to
take any such  actions  whether  or not the  Collateral  is in  Secured  Party's
possession. Debtor waives presentment and protest with respect to any instrument
included  in the  Collateral  on which  Debtor is in any way  liable  and waives
notice of any action  taken by Secured  Party  with  respect to any  instrument,
document or chattel paper included in any  Collateral  that is in the possession
of Secured Party.

8. EVENTS OF DEFAULT; REMEDIES

         8.1 The occurrence of any of the following  events or conditions  shall
constitute and is hereby defined to be an "Event of Default":

                  (a) Any  failure or  neglect to perform or observe  any of the
         terms, provisions,  or covenants of this Agreement, and such failure or
         neglect  either (i) cannot be  remedied,  (ii) can be  remedied  within
         fifteen  (15) days by prompt  and  diligent  action,  but it  continues
         unremedied  for a period of fifteen (15) days after  notice  thereof to
         Debtor, or (iii) can be remedied, although not within fifteen (15) days
         even by prompt and diligent  action,  but such remedy is not  commenced
         within  fifteen  (15) days  after  notice  thereof  to Debtor or is not
         diligently  prosecuted to completion  within a total of forty-five (45)
         days from the date of such notice.

                  (b) Any  warranty,  representation  or statement  contained in
         this  Agreement  that  shall be or shall  prove to have been false when
         made or furnished.

                  (c) Any levy or execution  upon,  or judicial  seizure of, any
         portion of the  Collateral or any other  collateral or security for the
         Obligation.

                  (d) Any  attachment  or  garnishment  of, or the  existence or
         filing  of  any  lien  or  encumbrance  against,  any  portion  of  the
         Collateral or any other  collateral or security for the Obligation that
         is not  removed  and  released  within  fifteen  (15)  days  after  its
         creation.
                                       -6-
<PAGE>
                  (e) The  institution  of any legal  action or  proceedings  to
         enforce any lien or  encumbrance  upon any portion of the Collateral or
         any  other  collateral  or  security  for the  Obligation,  that is not
         dismissed within sixty (60) days after its institution.

                  (f)  The  abandonment  by  Debtor  of all or any  part  of the
         Collateral.

                  (g) The loss,  theft or  destruction  of,  or any  substantial
         damage to, any portion of the  Collateral  or any other  collateral  or
         security  for  the  Obligation,  that  is  not  adequately  covered  by
         insurance.

                  (h) The  occurrence  of any event of default  under the Credit
         Agreement.

         8.2 Upon the  occurrence  of any Event of Default and at any time while
such Event of Default is  continuing,  Secured  Party  shall have the  following
rights and remedies and may do one or more of the following:

                  (a)  Declare  all  or  any  part  of  the   Obligation  to  be
         immediately due and payable,  and the same, with all costs and charges,
         shall be collectible thereupon by action at law.

                  (b)  Without  further  notice  or  demand  and  without  legal
         process, take possession of the Collateral wherever found and, for this
         purpose,  enter  upon any  property  occupied  by or in the  control of
         Debtor.  Debtor,  upon  demand by Secured  Party,  shall  assemble  the
         Collateral and deliver it to Secured Party or to a place  designated by
         Secured Party that is reasonably convenient to both parties.

                  (c)  Operate  the  business  of  Debtor  as a  going  concern,
         including,  without  limitation,   extend  sales  or  services  to  new
         customers and advance funds for such operation. Secured Party shall not
         be  liable  for  any  depreciation,  loss,  damage  or  injury  to  the
         Collateral  or other  property  of Debtor  as a result of such  action.
         Debtor  hereby  waives any claim of trespass  or replevin  arising as a
         result of such action.

                  (d) Pursue any legal or equitable  remedy available to collect
         the Obligation,  to enforce its title in and right to possession of the
         Collateral  and to  enforce  any  and  all  other  rights  or  remedies
         available to it.

                  (e) Upon  obtaining  possession of the  Collateral or any part
         thereof,  after notice to Debtor as provided in  Paragraph  8.4 herein,
         sell such  Collateral  at public or private sale either with or without
         having such Collateral at the place of sale. The proceeds of such sale,
         after deducting  therefrom all reasonable  expenses of Secured Party in
         taking,  storing,  repairing  and  selling  the  Collateral  (including
         reasonable  attorneys'  fees)  shall be applied  to the  payment of the
         Obligation, and
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<PAGE>
         any surplus  thereafter  remaining shall be paid to Debtor or any other
         person  that  may  be  legally  entitled  thereto.  In the  event  of a
         deficiency  between such net proceeds  from the sale of the  Collateral
         and the total amount of the  Obligation,  Debtor,  upon  demand,  shall
         promptly pay the amount of such deficiency to Secured Party.

         8.3 Secured  Party,  so far as may be lawful,  may  purchase all or any
part of the  Collateral  offered  at any  public  or  private  sale  made in the
enforcement of Secured Party's rights and remedies hereunder.

         8.4 Any demand or notice of sale,  disposition or other intended action
hereunder or in connection herewith,  whether required by the Uniform Commercial
Code or otherwise,  shall be deemed to be commercially  reasonable and effective
if such demand or notice is given to Debtor at least ten (10) days prior to such
sale,  disposition or other intended  action,  in the manner provided herein for
the giving of notices.

         8.5  Debtor  shall  pay  all  costs  and  expenses,  including  without
limitation costs of Uniform Commercial Code searches, court costs and reasonable
attorneys' fees,  incurred by Secured Party in enforcing payment and performance
of the  Obligation  or in  exercising  the rights and remedies of Secured  Party
hereunder. All such costs and expenses shall be secured by this Agreement and by
all  deeds  of  trust  and  other  lien  and  security  documents  securing  the
Obligation.  In the event of any court  proceedings,  court costs and attorneys'
fees  shall be set by the  court and not by jury and  shall be  included  in any
judgment obtained by Secured Party.

         8.6 In  addition  to any  remedies  provided  herein  for an  Event  of
Default, Secured Party shall have all the rights and remedies afforded a secured
party  under  the  Uniform  Commercial  Code and all other  legal and  equitable
remedies  allowed under  applicable law. No failure on the part of Secured Party
to exercise any of its rights hereunder  arising upon any Event of Default shall
be  construed  to  prejudice  its  rights  upon the  occurrence  of any other or
subsequent Event of Default. No delay on the part of Secured Party in exercising
any such rights shall be  construed to preclude it from the exercise  thereof at
any time while that Event of Default is  continuing.  Secured  Party may enforce
any one or more rights or remedies  hereunder  successively or concurrently.  By
accepting  payment or performance  of any of the Obligation  after its due date,
Secured Party shall not thereby waive the agreement  contained  herein that time
is of the  essence,  nor shall  Secured  Party waive either its right to require
prompt payment or performance when due of the remainder of the Obligation or its
right to consider the failure to so pay or perform an Event of Default.

9. MISCELLANEOUS PROVISIONS

         9.1 The  acceptance  of this  Agreement  by Secured  Party shall not be
considered a waiver of or in any way to affect or impair any other security that
Secured Party may have, acquire  simultaneously  herewith,  or hereafter acquire
for the  payment  or  performance  of the  Obligation,  nor shall the  taking by
Secured Party at any time of any such additional security be construed as

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a waiver of or in any way to affect or impair  the  Security  Interest;  Secured
Party may  resort,  for the payment or  performance  of the  Obligation,  to its
several securities therefor in such order and manner as it may determine.

         9.2 Without  notice or demand,  without  affecting the  obligations  of
Debtor  hereunder  or the  personal  liability  of any  person  for  payment  or
performance of the Obligation,  and without  affecting the Security  Interest or
the priority thereof, Secured Party, from time to time, may: (i) extend the time
for  payment  of all or any  part  of the  Obligation,  accept  a  renewal  note
therefor,  reduce the payments thereon, release any person liable for all or any
part  thereof,  or  otherwise  change  the  terms  of  all or  any  part  of the
Obligation;  (ii) take and hold other security for the payment or performance of
the Obligation and enforce, exchange, substitute,  subordinate, waive or release
any such security;  (iii) join in any extension or subordination  agreement;  or
(iv) release any part of the Collateral from the Security Interest.

         9.3 Debtor  waives  and agrees not to assert:  (i) any right to require
Secured Party to proceed  against any guarantor,  to proceed  against or exhaust
any other security for the Obligation,  to pursue any other remedy  available to
Secured Party, or to pursue any remedy in any particular  order or manner;  (ii)
the  benefits of any legal or equitable  doctrine or  principle of  marshalling;
(iii) demand, diligence, presentment for payment, protest and demand, and notice
of  extension,  dishonor,  protest,  demand  and  nonpayment,  relating  to  the
Obligation;  and (iv) any benefit of, and any right to participate in, any other
security now or hereafter held by Secured Party.

         9.4 The terms herein shall have the meanings in and be construed  under
the Uniform  Commercial  Code. This Agreement shall be governed by and construed
according to the laws of the State of Arizona.  Each provision of this Agreement
shall  be  interpreted  in  such  manner  as to be  effective  and  valid  under
applicable  law, but if any  provision  of this  Agreement is held to be void or
invalid, the same shall not affect the remainder hereof which shall be effective
as though the void or invalid provision had not been contained herein.

         9.5 No modification,  rescission,  waiver,  release or amendment of any
provision of this Agreement shall be made except by a written agreement executed
by Debtor and a duly authorized officer of Secured Party.

         9.6 This is a continuing Agreement which shall remain in full force and
effect until actual receipt by Secured Party of written notice of its revocation
as to future  transactions and shall remain in full force and effect  thereafter
until all of the Obligation  incurred before the receipt of such notice, and all
of the Obligation  incurred  thereafter  under  commitments  extended by Secured
Party before the receipt of such notice,  shall have been paid and  performed in
full.

         9.7 No setoff or claim that  Debtor  now has or may in the future  have
against  Secured  Party  shall  relieve  Debtor from  paying or  performing  the
Obligation.

         9.8 Time is of the  essence  hereof.  This  Agreement  shall be binding
upon,  and shall inure to the benefit  of, the parties  hereto and their  heirs,
personal representatives, successors and

                                       -9-
<PAGE>
assigns.  The term "Secured  Party" shall include not only the original  Secured
Party  hereunder but also any future owner and holder,  including  pledgees,  of
note or notes  evidencing the Obligation.  The provisions  hereof shall apply to
the parties according to the context thereof and without regard to the number or
gender of words or expressions used.

         9.9 All notices required or permitted to be given hereunder shall be in
writing and may be given, and shall become effective,  as provided in the Credit
Agreement.

         9.10 A carbon,  photographic or other reproduced copy of this Agreement
and/or any financing  statement  relating  hereto shall be sufficient for filing
and/or recording as a financing statement.

         9.11 Debtor authorizes Secured Party, without notice or demand, without
affecting the obligations of Debtor  hereunder or the personal  liability of any
person for payment or performance  of the  Obligation and without  affecting the
lien or the priority of the Security Interest, from time to time, at the request
of any  person  primarily  obligated  therefor,  to renew,  compromise,  extend,
accelerate  or  otherwise  change  the time for  payment or  performance  of, or
otherwise  change  the terms of,  all or any part of the  Obligation,  including
increase or decrease any rate of interest thereon.  Debtor waives and agrees not
to assert:  (i) any right to require Secured Party to proceed against  Borrower;
(ii) the benefits of any statutory provision limiting the liability of a surety,
including  without  limitation the benefit of Section  12-1641,  ET SEQ., of the
Arizona  Revised  Statutes;  and  (iii)  any  defense  arising  by reason of any
disability or other  defense of Borrower or by reason of the cessation  from any
cause  whatsoever  of the  liability of Borrower.  Debtor shall have no right of
subrogation  and hereby  waives any right to enforce  any remedy  which  Secured
Party now has, or may hereafter have, against Borrower.

         IN  WITNESS  WHEREOF,  these  presents  are  executed  as of  the  date
indicated above.

                                            THREE-FIVE SYSTEMS, INC., a Delaware
                                            corporation


                                            By: /s/ Jeffrey D. Buchanan
                                                --------------------------------
                                            Name: Jeffrey D. Buchanan
                                                 -------------------------------
                                            Title: Executive Vice President
                                                  ------------------------------

                                                                          DEBTOR
                                      -10-
<PAGE>
                                  SCHEDULE "A"

                             COLLATERAL DESCRIPTION

         All of the  property  described  below in, to or under which Debtor now
has or hereafter acquires any right, title or interest,  whether present, future
or contingent,  and in Debtor's  expectancy to acquire such property (all of the
property described on this schedule is herein called the "Collateral"):

                  1. All accounts, general intangibles,  instruments,  documents
         and chattel paper (including all accounts  receivable,  notes,  drafts,
         lease  agreements  and  security  agreements),  and all goods,  if any,
         represented  thereby,  whether now  existing or  hereafter  acquired or
         created from time to time in the course of Debtor's business;

                  2. All  inventory now owned or hereafter  acquired,  including
         all  goods  held  for sale or lease  in  Debtor's  business,  as now or
         hereafter  conducted,  and all materials,  work in process and finished
         goods used or to be consumed in Debtor's  business  (whether or not the
         inventory is  represented  by warehouse  receipts or bills of lading or
         has  been  or may  be  placed  in  transit  or  delivered  to a  public
         warehouse);

                  3. All  equipment now owned or hereafter  acquired,  including
         all  furniture,  fixtures,  furnishings,  vehicles  (whether  titled or
         non-titled),  machinery,  materials  and  supplies,  wherever  located,
         including  but not limited to such items  described  on the  collateral
         schedule (if any)  attached  hereto and by this  reference  made a part
         hereof, together with all parts,  accessories,  attachments,  additions
         thereto or replacements therefor;

                  4. All instruments, documents and chattel paper now held by or
         hereafter delivered to Secured Party, together with all property rights
         and  security  interests  evidenced  thereby,   all  increases  thereof
         (including, without limitation, stock dividends), all profits therefrom
         and all  transformations  thereof,  including  but not  limited to such
         items described on the collateral schedule (if any) attached hereto and
         by this  reference  made a part  hereof  (all  hereinafter  called  the
         "Specific Collateral-in-Possession");

                  5. All tax refund  claims,  all  policies or  certificates  of
         insurance covering any of the Collateral, all contracts,  agreements or
         rights of  indemnification,  guaranty or surety  relating to any of the
         Collateral, and all claims, awards, loss payments, proceeds and premium
         refunds  that may become  payable  with  respect to any such  policies,
         certificates, contracts, agreements or rights;
<PAGE>
                  6. All ledger cards, invoices, delivery receipts,  worksheets,
         books of accounts, statements,  correspondence,  customer lists, files,
         journals,  ledgers  and  records  in any form,  written  or  otherwise,
         related to any of the Collateral;

                  7.  Tradenames,  trademarks  and service marks (subject to any
         franchise or license agreements relating thereto);

                  8. All claims for loss or damage to or in connection  with any
         of the  Collateral,  all other  claims in any form for the  payment  of
         money,  including  tort  claims,  and all rights  with  respect to such
         claims and all proceeds thereof;

                  9. All accessions to any of the Collateral; and

                  10. All products and proceeds of the Collateral,  in any form,
         including  all proceeds  received,  due or to become due from any sale,
         exchange or other  disposition of any of the  Collateral,  whether such
         proceeds  are cash or noncash in nature or are  represented  by checks,
         drafts, notes or other instruments for the payment of money.

All "Collateral Schedules," if any, attached hereto are hereby incorporated into
this collateral description as if set forth here and at each reference thereto.